In an era of base programs and restrictions on milk production, the geography of the dairy sector depends on where willing milk buyers can be found. Increases in regional milk herds will primarily be driven by the development and expansion of cheese manufacturing in the next few years, mostly occurring in a central band of the U.S., including the Great Plains and Great Lake states.
For many years, milk production has been on a path of consolidation. We investigated this trend in a previous report, “The Changing Landscape of U.S. Dairy,” but a geographical trend has emerged. Cows (and the milk they produce) are increasingly moving away from the coasts and into the country's middle.
This shift in geography is closely related to the types of products consumers are demanding. The consumption of dairy products by U.S. consumers continues to increase. Still, it is consumed it mainly in cheese and other products like butter, yogurt, and ice cream, rather than drinking it as a beverage. Fluid milk is perishable and has historically relied on a network of farms and fluid processing plants close to urban population centers. Cheese production can be much more centralized and can be distributed as a finished product.
In 1975, Americans on average consumed 8.1 pounds of American-type cheese and 6.1 pounds of other-than-American cheese. On a milk-fat basis, the consumption of all dairy products translated into about 539 pounds of milk per capita. As of 2019, that milk equivalent increased by 114 pounds per person to the equivalent of 653 pounds (more than 60 gallons) of milk per person per year.
Much of that increase was thanks to cheese. It takes roughly ten pounds of milk to produce one pound of cheese, and we're eating more cheese. Between 1975 and 2019, consumers have nearly doubled American-type cheese consumption to 15.5 pounds per person. Other-than-American cheese has increased from 6.1 pounds to an impressive 22.8 pounds per person, thanks mainly to pizza.
Cheesemakers, in response, began to expand. Deciding on a location for a large-scale manufacturing operation comes down to striking the right balance between proximity to customers, like retail and foodservice distribution centers, and proximity to their raw input: farm milk. Other factors include energy prices, labor availability, regulatory environment and taxes.
Cheese manufacturing plants benefit from scale and do best when operating near capacity with a steady milk supply. Centrally located, large-scale operations can distribute the bulk cheese to cut-and-wrap facilities and retail distribution centers.
A large-scale cheese plant utilizes from 4 million to 14 million pounds of milk per day, requiring 50,000 to more than 150,000 cows to supply the plant. The farm-level investment is substantial, including barns, milk parlors, livestock, and land in the region, often requiring two to three times more capital than the cost of the plant. These manufacturing expansions cannot rely on the existing availability of milk in a given region, but instead rely on vertical coordination along the supply chain.
Two examples of modern large-scale cheese plants are Southwest Cheese in Clovis, New Mexico, and MWC in St. Johns, Michigan. Both plants are partnerships between Select Milk Producers, Dairy Farmers of America and Glanbia. These plants each absorb from 8 million to 14 million pounds of milk per day, the equivalent of more than 300,000 cows combined. Other plants in the Midwest have recently undergone expansions, and new plants on the horizon include Hilmar cheese in Dodge City, Kansas, and Great Lakes Cheese in Western New York.
These plants are generally located in areas where low-cost milk was available, and the opportunity existed to expand production in the region. Considering the basis between the regional mailbox milk price and the Class III milk price paid by cheese manufacturers as a measure of low-cost milk available for cheese manufacturing, New Mexico, Michigan and Kansas have been top contenders with the lowest average since 2015.
This colocation of manufacturing plants and the relatively small number of large, milk-producing partner farms changes the dynamics and roles of cooperatives. In the past, a plant may have moved to an area and worked with multiple cooperatives in the region to source milk. Now it is more common for a smaller group of farms to work directly with the plant – as is the case with the anticipated Hilmar plant in Kansas – or for a cooperative to be a partner in the project – as is the case with Select Milk and DFA in the Michigan and New Mexico cheese plants.
Although the same economies of scale and rapid expansion may not be occurring in coastal states, or there may be more regulatory burdens, there is still hope. Technologies like robotic milking, methane digesters, and other scale-appropriate modernizations will help medium-sized farms remain competitive in markets with barriers to scale. And with growing export market participation, proximity to ports will remain valuable.
The landscape of dairy production and processing in the years ahead will be more concentrated in the country's center and defined by greater coordination between producers and processors seeking optimal locations to meet the evolving consumer demand.
